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I’m a hedge fund manager. Not a big fund all things considered, just a few hundred million. But I think about stuff like this for a living. Here’s why you can s

I’m a hedge fund manager. Not a big fund all things considered, just a few hundred million. But I think about stuff like this for a living. Here’s why you can safely ignore this article. There is always someone predicting an upcoming market crash. People like Grantham (cited in the post) have been predicting a mega crash for most of the last decade. Market crashes occur every 10-20 years but the thing is, over that 10-20 year cycle the market is always net up, so if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns. The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). Market cap/earnings and market cap/GDP are high now because interest rates are low (asp because growth expectations are high, but that’s not necessarily incorrect). Before the dot com crash US interest rates were 6%, compared to 0.25% now — of course that skews the statistics. Michael Burry is cited as “someone with a proven track record of predicting market crashes” but in fact he predicted exactly one crash. Well, so did John Paulson, and the ensuing decade proved that it was just luck. Mark Cuban “predicted” the dot com crash. It doesn’t mean they are geniuses, it means they got lucky once. Growth in margin debt is cited as a reason to worry. But margin debt has grown because assets have grown. The S&P 500 has double since the lows of March 2020, so the fact that margin debt has doubled is not a cause for concern. As a percentage of assets, margin debt has been stable for the last decade. This post is pointless fearmongering, nothing more. Of course, there will be a crash at some point. It could be in six months, a year, five years or ten years. This guy can’t predict it any better than anyone else can.

kimsant 5y ago
The key is not to predict a black swan, but to keep reasoning and awake, trying to figure out where the focus is needed. I don't value the outcome (you call it luck), but the reasoning behind.
arc-in-space 5y ago
> interest rates are high Did you mean to say low, or are you talking about nominal rates?
- avvt4avaw 5y ago
  I meant to say low.
  - dang 5y ago
    I fixed it (see https://news.ycombinator.com/item?id=29617675 https://news.ycombinator.com/item?id=29617675). I hope that's ok.
newaccount2021 5y ago
Every investor must, in a sense, "think about this stuff for a living" Readers should keep in mind that when NASDAQ crashed in 2000, many professional fund managers fared much more poorly than the typical naive retail investor
wavegeek 5y ago
> over that 10-20 year cycle the market is always net up This is simply not true especially if you take inflation into account. And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias). For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm http://www.simplestockinvesting.com/SP500-historical-real-to...
- arisAlexis 5y ago
  You are replying with a fixed period that confirms your claim while comment OP was talking about total returns which you can be sure are not zero. If you are handpicking periods you can find a month in the last 2 years that was negative and make a claim that the stock market didn't go up but it did, > 100%.
  - nabla9 5y ago
    Real Total return (inflation adjusted, dividends included) of SP500 has been negative in two decades. 1970s and 2000s. The original claim is 10-20 years. That's a valid ballpark estimate. There can be lost decades, but when you get closer to 20 years, it has been all good. ps. If you spread the entry into market into 5-10 years there has never been a decade of zero or negative returns (total, inflation adjusted).
- irthomasthomas 5y ago
  You may be right, but I don't think we should compare ourselves to Japan, or cite them as an example in discussions about economics. Japan's priorities are totally different to most countries. They prefer to work hard at preserving the status quo, than chasing growth and change. Japan has many businesses that are hundreds, even thousands of years old, and still selling the same stuff. Many of these businesses have the same goal; to survive the next 50 years with 2% growth p.a.
  - neffy 5y ago
PaywallBuster 5y ago
I wonder why is there no "market insurance" products/services... Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc) Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html https://www.amplifyetfs.com/swan.html) or similar to protect against these events?
- fbn79 5y ago
  People wanna get rich quickly. Dont want to buy products that underperform SPY because of edging and managing expenses
  - PaywallBuster 5y ago
    SPY can crash 50% or more just as likely, therefore why I suggest some sort of "insurance". Even if SPY would be better than any less diverse or hand picked options from retail under the same crash market conditions
- lotsofpulp 5y ago
  >I wonder why is there no "market insurance" products/services... Paper currency, FDIC insured bank accounts, CDs, TIPS, Treasuries, VCSH… Biggest of all, having a network of people that can and will help you (such spouse, kids, grandkids, cousins friends, political allies, etc)
  - PaywallBuster 5y ago
    Certainly, my idea is that if you have a stock portfolio, you could get "insurance" on it Big banks and investment funds certainty do it, one way or another I'was simply thinking of a more accessible approach to retail investors "insurance as a service", pay 50$ per month for protection against stock crashes Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
    - 5y ago
kqr 5y ago
> The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.
fredgrott 5y ago
I do not mean to be critical, but when you take some view points together that converge on a specific crash with actual factual fundamentals of how it will happen and why it really does not matter that any of that group only predicted it once. Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several. We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays. Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash. Is the Log4j vun one tiny crash of one system or a crash of several?
fnord77 5y ago
articles like this almost always point to high asset prices as a reason for a coming crash. And also high inflation as a reason for coming deflation. Then throw in some cherry picked data to support their take. BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck. Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic
nabla9 5y ago
While I mostly agree with and everything you say is factual, the danger always lurks where you are not looking. As we know from the past, systemic risk grows somewhere without good statistics. FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us. There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.
arubania 5y ago
This. More people should realize that the accuracy = hits / shots, and Michael Burry keeps shooting out predictions on a regular basis now. His "proven track record" would be less than 10%, I'd imagine.
02020202 5y ago
since you say you are a HFM, let me pick your brains a bit :) 1. how do you decide when to move in/out of a position? 2. how long does it take to open up or close a position once you want to do it? 3. do you have internal processes for approvals? or what is the flow form idea to execution when it comes to positions(open/close)? 4. when you sell for tax loss purposes, how soon are you re-opening the position? will you do it asap or will you maybe wait and see where the market is going? 5. what news sources do you prefer to read for getting ideas for new positions? 6. do you look for new opportunities by screening stocks often or do you do it once in a while and wait for the right time? 7. how and why do you use shorting(if)? Cheers.
arielweisberg 5y ago
Thank you for your service. I will be staying the course as always. HODL.
4monthsaway 5y ago
Thanks for the interesting points, one quick question I don't quite get, you state interest rates are high now but then reference them being 0.25%?
- avvt4avaw 5y ago
  Typo, I meant to say they are low now.
  - 4monthsaway 5y ago
    Ah, cheers
  - dang 5y ago
    Ok, I've replaced "interest rates are high" with "interest rates are low" in your GP comment. I hope that's what you meant!
upofadown 5y ago
> ... if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns. Returns? Or prices? Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.
- ac29 5y ago
  I think the point was if you are worried about a hypothetical 50% crash (or whatever number), sitting in cash investments with near zero return isn't necessarily the best strategy. You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade). I know people that have been waiting for a crash for so long that it would take something like a 75% drop in markets to now vindicate their strategy of waiting on the sidelines.
  - movedx 5y ago
    > You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade). And to add to this, dollar cost averaging means if you drop from 300% gains to 200% gains (let's say the market drops 100% for a laugh), you're not only still up 200%, but as your (automated) investment strategy continues to buy stocks you're now buying them at a massive discount. When they climb again, you won't be up 300% again, you'll be up closer to 1,000% (a lot, anyway.)

kimsant 5y ago

The key is not to predict a black swan, but to keep reasoning and awake, trying to figure out where the focus is needed. I don't value the outcome (you call it luck), but the reasoning behind.

arc-in-space 5y ago

> interest rates are high Did you mean to say low, or are you talking about nominal rates?

avvt4avaw 5y ago
I meant to say low.
- dang 5y ago
  I fixed it (see https://news.ycombinator.com/item?id=29617675 https://news.ycombinator.com/item?id=29617675). I hope that's ok.

newaccount2021 5y ago

Every investor must, in a sense, "think about this stuff for a living" Readers should keep in mind that when NASDAQ crashed in 2000, many professional fund managers fared much more poorly than the typical naive retail investor

wavegeek 5y ago

> over that 10-20 year cycle the market is always net up This is simply not true especially if you take inflation into account. And even more so if you look outside the US (one of the top 1% of market performers over the last 100 years - hindsight bias). For example Japan total return index had a 30 year drawdown post 1989 even in nominal terms. The US market from 1966-1992 total inflation adjusted return (26 years) was zero. http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm http://www.simplestockinvesting.com/SP500-historical-real-to...

arisAlexis 5y ago
You are replying with a fixed period that confirms your claim while comment OP was talking about total returns which you can be sure are not zero. If you are handpicking periods you can find a month in the last 2 years that was negative and make a claim that the stock market didn't go up but it did, > 100%.
- nabla9 5y ago
  Real Total return (inflation adjusted, dividends included) of SP500 has been negative in two decades. 1970s and 2000s. The original claim is 10-20 years. That's a valid ballpark estimate. There can be lost decades, but when you get closer to 20 years, it has been all good. ps. If you spread the entry into market into 5-10 years there has never been a decade of zero or negative returns (total, inflation adjusted).
irthomasthomas 5y ago
You may be right, but I don't think we should compare ourselves to Japan, or cite them as an example in discussions about economics. Japan's priorities are totally different to most countries. They prefer to work hard at preserving the status quo, than chasing growth and change. Japan has many businesses that are hundreds, even thousands of years old, and still selling the same stuff. Many of these businesses have the same goal; to survive the next 50 years with 2% growth p.a.
- neffy 5y ago

PaywallBuster 5y ago

I wonder why is there no "market insurance" products/services... Could be a simple monthly subscription which buys managed basket of options (call on VIX, puts on SP500, Nasdaq, etc) Or should the average retail investor get into the Black Swan ETF (https://www.amplifyetfs.com/swan.html https://www.amplifyetfs.com/swan.html) or similar to protect against these events?

fbn79 5y ago
People wanna get rich quickly. Dont want to buy products that underperform SPY because of edging and managing expenses
- PaywallBuster 5y ago
  SPY can crash 50% or more just as likely, therefore why I suggest some sort of "insurance". Even if SPY would be better than any less diverse or hand picked options from retail under the same crash market conditions
lotsofpulp 5y ago
>I wonder why is there no "market insurance" products/services... Paper currency, FDIC insured bank accounts, CDs, TIPS, Treasuries, VCSH… Biggest of all, having a network of people that can and will help you (such spouse, kids, grandkids, cousins friends, political allies, etc)
- PaywallBuster 5y ago
  Certainly, my idea is that if you have a stock portfolio, you could get "insurance" on it Big banks and investment funds certainty do it, one way or another I'was simply thinking of a more accessible approach to retail investors "insurance as a service", pay 50$ per month for protection against stock crashes Technically, I'm guessing this would not be called "insurance" but a financial instrument or investment which buyers/investors would get benefits under certain conditions.
  - 5y ago

kqr 5y ago

> The post author frequently compares flow variables (eg earnings, GDP) to stock variables (eg market cap). That’s not necessarily terrible, but the ratio is always sensitive to interest rates (because the stock variable discounts future values of the flow variable, and when rates are low the discounting has less of an effect). This was an incredibly clear way to put it. I can't believe I haven't thought of it that way before! Thanks.

fredgrott 5y ago

I do not mean to be critical, but when you take some view points together that converge on a specific crash with actual factual fundamentals of how it will happen and why it really does not matter that any of that group only predicted it once. Your conflating it with one data point, as those differing viewpoints that predicted 2008 is in a group is than one data point as they all covered a different mechanism of a set of systems as it was not just one system that crashed but several. We have the same problem in medicine, ritalin is based on one system solution of ADHD...however if you foloow a multiple system approach you can take Phenyanalinine and Darek chocolate, L-glutamine, etc and actually have a better solution of managing adhd without having to do drug holidays. Crashes are convergence of several data points of crashes in multiple systems that converge together to produce abig crash. Is the Log4j vun one tiny crash of one system or a crash of several?

fnord77 5y ago

articles like this almost always point to high asset prices as a reason for a coming crash. And also high inflation as a reason for coming deflation. Then throw in some cherry picked data to support their take. BTW, Michael Burry seems completely unhinged and I can't help but wonder if he just had pure luck. Any real reasons, like 2008 where people started to realize security products were built on fraud at a massive scale? I mean crypto is a ponzi scheme but when that implodes 1 to 100 years from now, that's not going to make a big denty in the economic

nabla9 5y ago

While I mostly agree with and everything you say is factual, the danger always lurks where you are not looking. As we know from the past, systemic risk grows somewhere without good statistics. FINRA Margin Debt shows $940 Billon. There is an additional shadow margin of unknown size. Margin debt, shadow margin, taking loans against properties and buying stocks, ... the size of leverage may surprise us. There may be even larger systemic risk in the corporate debt market. The liquidity of high-yield is questionable and rating agencies (again) seem to be again part of the problem in rating junk as BBB. Bond market is not as boring as it used to be.

arubania 5y ago

This. More people should realize that the accuracy = hits / shots, and Michael Burry keeps shooting out predictions on a regular basis now. His "proven track record" would be less than 10%, I'd imagine.

02020202 5y ago

since you say you are a HFM, let me pick your brains a bit :) 1. how do you decide when to move in/out of a position? 2. how long does it take to open up or close a position once you want to do it? 3. do you have internal processes for approvals? or what is the flow form idea to execution when it comes to positions(open/close)? 4. when you sell for tax loss purposes, how soon are you re-opening the position? will you do it asap or will you maybe wait and see where the market is going? 5. what news sources do you prefer to read for getting ideas for new positions? 6. do you look for new opportunities by screening stocks often or do you do it once in a while and wait for the right time? 7. how and why do you use shorting(if)? Cheers.

arielweisberg 5y ago

Thank you for your service. I will be staying the course as always. HODL.

4monthsaway 5y ago

Thanks for the interesting points, one quick question I don't quite get, you state interest rates are high now but then reference them being 0.25%?

avvt4avaw 5y ago
Typo, I meant to say they are low now.
- 4monthsaway 5y ago
  Ah, cheers
- dang 5y ago
  Ok, I've replaced "interest rates are high" with "interest rates are low" in your GP comment. I hope that's what you meant!

upofadown 5y ago

> ... if you sit out the cycle because of worries about an upcoming crash you could easily miss out on 5-10 years of great returns. Returns? Or prices? Unless you actually cash out you are still supporting the collective delusion. That is true even over booms and busts.

ac29 5y ago
I think the point was if you are worried about a hypothetical 50% crash (or whatever number), sitting in cash investments with near zero return isn't necessarily the best strategy. You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade). I know people that have been waiting for a crash for so long that it would take something like a 75% drop in markets to now vindicate their strategy of waiting on the sidelines.
- movedx 5y ago
  > You're much better positioned for a large loss if you are up hundreds of % first (the SP500 is up 300% or so in the past decade). And to add to this, dollar cost averaging means if you drop from 300% gains to 200% gains (let's say the market drops 100% for a laugh), you're not only still up 200%, but as your (automated) investment strategy continues to buy stocks you're now buying them at a massive discount. When they climb again, you won't be up 300% again, you'll be up closer to 1,000% (a lot, anyway.)